PART I - OVERVIEW OF MAIN FINDINGS,
INCLUDING TRADE AND FOOD SECURITY ISSUES

1. Highlights

· Growth in global production of
and demand for the main agricultural commodities is projected to grow on average
by about 1.6 percent annually or 0.3 percent on a per capita basis during the
period to 2010. This is a decline in aggregate and per capita growth from that
experienced during the 1990s. Factors responsible for the slowing of world
demand include reduced population growth, high current consumption and often
saturated markets in the developed countries and, for some agricultural raw
materials, increasing competition by synthetics.

· In the developing countries,
aggregate production and consumption of the main agricultural commodities are
projected to grow at 2.0 percent a year, considerably less than the 3.2 percent
of the 1990s. In per capita terms, production and consumption are still expected
to grow on average at 0.4 percent annually due to the projected slowdown in
population growth.

· The growth of world trade in
agricultural commodities, which was so robust in the 1990s, is expected to
moderate in the projection period despite the beneficial effects of policy
reforms. The slowdown in the present projections is due to the sharp falls in
growth foreseen for fats, oils, oilmeals, meat, fruit, tropical beverages and
most agricultural raw materials. However, the slowdown in market growth for the
major agricultural products covered could be offset to some extent by other
growth sectors not included in the study, particularly in the processed food
products sector.

· The projections point to a
deterioration in the net agricultural trade position of the developing
countries. Though export volumes are projected to rise, and real earnings could
also rise, population growth and the associated requirement for imports of food
will absorb all or part of the increase.

· Of particular concern is the
increase foreseen at constant prices in the net food imports of the low-income
food-deficit countries (LIFDCs), a matter that lends urgency to incentives to
boost their food production capacity. The situation of the Marrakesh Decision
groups of least developed and net food-importing developing countries is
similar.

· The long term trend decline in
real prices, which show prices of all agricultural commodities declining
relative to those of other major economic sectors over the 1970 to 2002 period,
has averaged about 2 percent per year. Over the projection period, world market
prices in real terms, that have recently been below longer term trend levels,
are expected to return toward their trend levels.

· Further agricultural policy
reforms would help to boost global agricultural markets. Farm support in
industrialized areas remains high while multilateral negotiations are still at
an early stage under the Doha Development Agenda in the WTO.

· Though the "baseline"
projections suggest that most markets will be in fairly close balance by 2010,
they are likely to be subject to instability. Crop failures both global and
regional levels are an ever present threat and the cushion provided by stocks
for most commodities will tend to diminish for most commodities.

· A low production scenario of
selected basic foodstuffs in OECD countries indicates that assumed shortfall
will not be fully compensated by an equivalent increase in production in the
developing countries. Higher prices would lead to lower consumption and less
imports.

· An alternative high production
scenario of such commodities in the low-income food-deficit countries (LIFDCs)
indicates that the augmented production would not contribute to a substantial
improvement of the food situation in these countries. In fact, food and feed
consumption would increase only marginally with respect to what projected in the
baseline. However, their net food imports would be somewhat reduced.

· In cereal markets, stocks
relative to utilization are projected to remain below their previous longer term
averages, especially given policy reforms in many countries. This may also mean
that the risk of an upward price movement over a shorter term period may become
more frequent than in the past.

· The future prospects for
countries that are the most food insecure are not likely to improve
substantially in comparison to current trends in their calorie intake. While
market prices may be favourable to enhancing consumption, other factors may have
a negative impact on their food security. These include the continued intense
competition for most bulk commodities that play an important role in generating
export revenues and agricultural and rural incomes, a decrease in per capita
domestic food production and slow to modest national economic growth. Together
these factors would likely mean slow progress in reducing under-nourishment in
these countries. Even a more rapid economic growth would not significantly
address their hunger problem in the short to medium term.

2. An overview of the medium-term
outlook: baseline and alternative scenarios

This section provides a summary of the main findings with
regard to the baseline projections to 2010 and two alternative scenarios
concerning the production of basic food products in OECD countries and LIFDCs.
It begins with a review of key assumptions underlying the baseline scenario as
well as of fundamental market trends and recent policy developments.

Population and income
assumptions

Global demand for many commodities is crucially linked to
economic and population growth and, especially in developing countries, to
population shifts from rural to urban areas. Commodity projections to 2010 are
based on the United Nations medium variant, which estimates that
worlds population will expand by 1.3 percent annually over the period from
1998 - 2000 to 2010, down from the 1.5 percent per year recorded in the previous
decade. In developing economies, population growth is anticipated to slow to 1.6
percent annually; in the developed countries to 0.3 percent, and in transition
economies to 0.04 percent. About 97 percent of the growth in world population
originates in developing countries (Table 1.1).

World gross domestic product (GDP) assumptions are based on
the projections of the World Bank and IMF. Total world GDP is estimated to
increase by 2.9 percent per year, a modest acceleration compared with 2.4
percent of the previous decade. World per capita GDP is expected to increase by
1.7 percent annually, compared with 0.9 percent of the previous decade. The
estimated improvement in world GDP is largely based on the continuing recovery
projected for the economies in transition, which may grow at 4.5 percent per
year. In the developing countries, total GDP is assumed to rise by 4.6 percent
annually or by 3.0 percent in per capita terms.

Historical trends and policy
perspectives

The analysis of historical trends reveals that the
productivity growth in global agriculture has so far been sufficient to meet
effective demand. Over the past three decades, world agriculture production has
grown faster than population. Increased productivity stemming from the use of
new technologies in many industrialized countries has been in part responsible
for the long-term decline in real commodity prices. In practice, world
agriculture has been operating in an environment where effective demand has been
constrained by a number of factors. The rapid growth of agriculture has
co-existed with hundreds of millions of world population not having enough food
to eat.

Limits on the demand side at the global level reflected three
main factors: i) the slowdown in population growth from the early 1960s onwards;
ii) the saturation in the levels of per capita food consumption for a growing
share of world population and iii) the difficulty in improving consumption by
those who were too poor to purchase it or did not have enough resources to
produce it themselves.

The first two factors will continue to dominate in the future.
Their impact will be reflected in lower growth of demand than in the past and,
indirectly, also of production. The third factor will also continue to play a
major role, given that the overall economic outlook indicates that low incomes
and poverty will remain widespread in the future. It follows that for a rather
large part of the world population potential demand would not automatically
translate into effective demand (see also section 3 below). Thus, the slowdown
observed in the past trends of world demand is likely to persist and perhaps
even to accelerate in the future.

On the production side, there is no certainty that the past
experience of rapid productivity growth and extended utilization of land will
continue. In terms of the natural resources that are required for food and
agriculture production, there are already indications of losses of farmland,
limits to freshwater supplies, erosion and degradation of soils, and declining
genetic diversity. For agriculture, there are biological limits to yields,
diminishing returns, and associated problems from the intensive use of
fertilizers and pesticides. As hazards, there are new plant and animal diseases,
increased ultraviolet radiation, air pollution, climate change, and sea-level
rise. There are also socioeconomic constraints of inadequate markets,
infra-structure and research investment, and limited access by poor farmers to
land, capital, and technology.

As alternatives to these specific biophysical and
socioeconomic limitations, there are at least four major opportunities for
increasing the food supply: i) the unrealized potential to increase yields from
the application of current techniques and technologies; ii) the possibilities
provided by the biotechnological revolution that is now underway; iii) the
development of organic and sustainable agriculture techniques which could
rehabilitate degraded lands with consequent productivity gains; and iv) the
opportunity to reduce food losses and to increase efficiency in the preparation
and use of food.

Doubling or trebling global food production is within the
range of the possible. But to do so, many changes and improvements are need in
farmers' fields, in research institutions, in agricultural markets, and in the
households that consume the food produced.

Further, fundamental agricultural policy reforms would help to
sustain a recovery in global agricultural markets. Farm support in
industrialized areas remains high while multilateral negotiations are still at
an early stage under the Doha Development Agenda in the WTO.

In the following section a brief overview is given of the
expected increase in aggregate volume production, demand and trade of the
agricultural commodities covered in the study. The figures are obtained by
multiplying physical quantities of production, demand and trade times price for
each commodity and summing up over all commodities (each commodity is valued at
the same average international prices in all countries and in all
years).

More details on the outlook for individual commodities and
countries, including related policy issues, are presented in Part II.

The baseline projection: Growth in
agricultural production and demand, and main trade issues

At the world level, aggregate production of agricultural
commodities is projected to grow on average by about 1.6 percent annually or 0.3
percent on a per capita basis during the period to 2010 (Table 1.2). This is a
decline in aggregate and per capita growth from that experienced during the
1990s. In any case, aggregate agricultural production is projected to grow, on
average, less than the economy at large. Nevertheless, this is likely to
maintain on-going pressure on resources in agriculture and on demands for
increased government assistance, which if not supplied may cause declines in
income and living standards in rural communities. The commodities likely to grow
most rapidly are those more responsive to income changes including oilcrops,
meat (poultry), sugar and certain tropical beverages. Cereals and especially
agricultural raw materials are projected to grow least (Chart 1).

Chart 1. Growth of world agricultural production by
selected commodity groups

Agriculture in developing countries is projected to grow most
strongly with aggregate growth at 2 percent annually, which is considerably less
than that the 3.2 percent of the1990s, as rapid growth rates in oilcrops, meat
and fruits return to more modest levels (Table 1.3 and Chart 2). In the
industrialized countries, demand growth is slow, and consumer concerns are
rising, not just for safety and quality, but also for production processes
(Table 1.5). Development of "quality/tracking systems" is an increasingly
predominant feature of agriculture and food economies worldwide, often driven by
large retail chains that reach across borders. While common concerns may
integrate across developed country markets, segmentation of markets will
continue given differing capacities of countries to meet corresponding
compliance costs. At the same time, the shares of markets continue to shift to
developing countries, with potential for accommodating greater regional trade
within different market segments. While uncertainty over how genetically
modified organisms will impact markets will persist, the primary impact will
concern those commodities currently affected, mainly soybeans, maize and cotton,
until wider consumer concerns are addressed.

The major economic change in the projection period is the
turnaround in transition economies which has been underway in the past few
years, and is expected to continue (Table 1.4).

Growth in world trade, which was so robust in the 1990s, is
projected to moderate in the projection period, particularly for oilseeds and
meats. Annual growth in total exports (volume basis) is projected to fall to 2.1
percent from 2.9 percent in the 1990s. There are several reasons for the decline
in the growth of trade, one of which is simply that high growth for certain
commodities started from a low base. Another one is trade reform, especially
through regional agreements and through WTO, which contributed to growth in the
1990s. Without further reform, aggregate trade growth can be expected to slow as
market access continues to be highly restricted, particularly for certain
commodities, such as sugar, and dairy products. However, even without further
trade reform, low cost suppliers continue to increase trade shares for most
commodities. Preference arrangements, either in the form of regional trade
agreements, or new trade preferences may help generate trade diversion and some
trade growth, particularly in further processing of value-added
products.

Chart 2. Past and projected growth of agricultural
production by economic areas

Factors in the projected increase of world demand include the
relatively strong economic growth still expected in the developing countries and
the recovery in the demand projected for some of the economies in
transition.

The developing countries will account for much of the growth
in overall commodity demand because of their comparatively buoyant per capita
GDP expansion and the greater responsiveness of demand to income growth (Chart
3). By contrast a slow growth in demand is foreseen for the developed countries,
because high current per capita consumption and slow growth of population are
expected to limit the demand growth rate for many commodities. Aggregate demand
of basic foodstuffs in the developing countries is projected to grow by 2.0
percent annually over the period 1999* - 2010[1],
i.e. slower than the 3.2 percent annual rate during the previous decade but
still allowing for increases in per capita consumption. By contrast, the
developed countries are projected to raise their demand of basic foodstuffs by
0.9 percent annually and the economies in transition by 1.3 percent annually.
The aggregate imports, however, of developing countries for the commodities
covered in the projections are expected to rise by 2.4 percent annually over the
period 1999* - 2010, thus increasing their share of world agricultural
imports.

The net imports of low-income food-deficit countries for basic
foodstuffs (cereals, livestock products, oilseeds and oils) are projected to
increase from about US$21 billion in 1999* to about US$33 billion in 2010 (at
constant 1998 - 2000 average prices).[2] A
similar situation is projected for least developed countries (LDCs) and for net
food-importing developing countries (NFIDCs). This pattern not only reflects
growth in demand in these regions relative to the capacity domestically to meet
that demand, but also the growth in excess supply from other regions.

World market prices in real terms have recently been all below
their longer term trend levels (Charts 4 to 6). They are expected to return
toward their trend levels over the projection period. The long term trend
decline in real prices, which shows prices of all agricultural commodities
declining relative to those of other major economic sectors over the 1970 to
2002 period, has averaged about 2 percent per year. Such a trend decline has
reflected relatively greater productivity growth in agriculture.

With indicators in this projection showing a slowing of
productivity growth, without a major shift in technology, the projection results
indicate a decline slower than that implied by the trend over the 1970 - 2002
period. Some commodity prices are currently moving higher; this development
should be viewed in response to short term factors which may not persist in the
longer term. Despite low real prices, opportunities do exist for producers and
countries that are able to be at the forefront of technology/cost reduction or
exchange rate driven change. They will gain market share. The agricultural
turnaround in transition countries may impact on markets, both as exporters and
importers.

In cereal markets, stocks relative to utilization are
projected to remain below their previous longer term averages, especially given
policy reforms in many countries. This may also mean that the risk of an upward
price movement over a short term period is more likely than a further fall in
prices. However, given the ability of world supply to respond in a context of
slow demand growth, such price strength would likely be short lived.

Alternative scenarios for basic
food products

Two alternative scenarios to the baseline scenario for basic
food products are explored in this section. These are: a low production scenario
of basic foodstuffs by OECD countries and a high production scenario by
LIFDCs.

Low production scenario in the OECD countries

The "baseline" projections indicate that, as world population
expands by about 900 million inhabitants in the current decade, food consumption
will increase by almost 20 percent worldwide and by one-fourth in the developing
countries. To match this increase world output of basic foodstuffs will have to
grow by 1.6 percent per year. This will add considerable pressure on natural
resources: Farmers have two options: to intensify production on areas already in
use or to expand cultivation into new areas.

In the past decade, all of the increase in world cereal
production was due to increases in yields while area has actually declined by
27.9 million hectares or 4 percent. In the developed countries, yield increase
has been even greater. In these countries cereal production has increased by 108
million tonnes while area was reduced by 11.7 million hectares or 8 percent: But
intensification can also produce problems. Rising yields by increasing the use
of chemicals, diverting more water for irrigation and intensifying cropping also
with the use of genetically modified seeds can create problems for the
environment. Runoff of fertilizers and animal wastes can cause algal blooms and
the eutrophication of lakes and enclosed seas. Although these problems are more
common in Western Europe and North America, pollution from agricultural
activities is becoming significant in Eastern Europe and in certain areas of the
developing world.

To simulate the impact of environmental concerns on food
output, a low production scenario was considered for the current decade. This
scenario assumes a reduction of 5 percent in the area projected for wheat, rice,
coarse grains and soybean under the "baseline" scenario in the OECD countries
with the exception of Australia and New Zealand. The reduction could either
derive from unilateral changes in national set-aside programmes or result from
changes in crop support policies associated with the outcome of the WTO trade
negotiations on agriculture.

World cereal production would fall by 18.7 million tonnes
below the level projected for the "baseline" scenario. The large drop in the
cereal output of the OECD countries, i.e. about 28.1 million tonnes, will be
partly offset by an increase of about 5.8 million tonnes in the cereal output of
the developing countries. The compensation would be only 23 percent for maize
and 30 percent for wheat, thus leaving large shortfalls at the global production
levels.These low rates of replacement mainly reflect the relatively isolated
domestic market behaviour of the developing countries in relation to changes in
international market prices.

As a consequence of the 6 percent rise in international cereal
prices, aggregate world consumption of cereals would drop by 16.5 million tonnes
or by 0.8 percent below the level projected in the baseline scenario. In the
developing countries consumption of wheat and maize would fall by 0.8 percent
and 1.3 percent, respectively.

International trade in cereals under this scenario would
decline by 6 million tonnes over the level of 280 million tonnes projected in
the baseline scenario. Developing countries would reduce imports and expand
exports with a consequent large decline in their net import position. Net import
of wheat would decline by 7.8 percent with respect to the "baseline" scenario;
that of maize would fall by 20 percent while net export of rice would increase
by 70 percent.

The impact of this scenario on the projected production of
soybean would be even larger in relative terms. The developed countries would
reduce their output of soybean by 3.6 million tonnes or by 4 percent with
respect to the level of 86 million tonnes projected in the baseline scenario At
the world level, the drop in the soybean output of the OECD countries would be
marginally offset by an addition of 0.9.million tonnes in the output of the
developing countries over the level projected by the year 2010.

High production scenario in the LIFDCs

A bumper crop scenario, almost a mirror image of the assumed
low production scenario in the OECD countries, was run to assess the impact of
increased cereal output on the food supply situation of the low-income
food-deficit countries (LIFDCs) excluding India and China.

This scenario assumes a 5 percent increase in the cereal
yields with respect to those projected in the baseline scenario, possibly
associated with simultaneously favourable weather conditions and technological
improvements in these countries.

The aggregate effect of the simulated shock is an increase of
12.4 million tonnes or 4.6 percent in the cereal production of the LIFDCs with
respect to the level projected in the baseline. It should be noted that the
increase is slightly smaller than the assumed rise in cereal yields due to the
reduction in the area under cereals associated with lower producer prices (Chart
7).

International trade in cereals would decline by 1.8 percent
and the imports of the LIFDCs would fall by 8.7 percent.

Overall, the increase in cereal output would not contribute to
a substantial improvement in the food supply situation in these countries. In
fact, there would be only a 0.3 percent increase in food and feed cereal
consumption. About 64 percent of the increase in cereal production would be
allocated to domestic market and 28 percent to export which would expand by 62.6
percent compared to the level projected in the baseline. As a result, trade
market prices of cereals are expected to decline by 1.8 percent.

With the reduction of imports and the increase of exports, the
net import cereal bill of the LIFDCs would be US$2.3 billion lower than that
projected in the baseline, i.e. US$14.7 billion evaluated at constant 1998/2000
prices.

[1] Throughout
this report, a year marked with an asterisk (*) signifies the average of
the three years centred on the year shown.[2] Prices are world export unit
values.